CL Financial bailout threatens T&T’s credit rating

From credit rating agency Standard & Poor’s on Tuesday (emphasis and in-line explanations mine):

NEW YORK, Feb. 3, 2009–Standard & Poor’s Ratings Services said today that it placed its ‘A/A-1’ foreign-currency and ‘A+/A-1’ local-currency sovereign credit ratings on the Republic of Trinidad and Tobago on CreditWatch with negative implications.

[Credit watch with negative implications means the ratings agency is considering downgrading T&T’s existing credit rating; any subsequent rating action is normally taken within three months. A sovereign’s credit rating is important because it determines (among other things) how much that country will pay to borrow in the international debt markets. Essentially, a credit rating is an assessment of a country’s creditworthiness; it is an indicator of that country’s willingness and ability to repay its debts. As a benchmark, S&P rates the United States as triple-A – the highest possible rating – while Jamaica is currently rated B]

“The CreditWatch placement follows the government’s announcement on Jan. 30, 2009, that it will assume control of or provide support to several key subsidiaries of the CL Financial Group (CLFG), a large Trinidadian financial conglomerate,” explained Standard & Poor’s credit analyst Roberto Sifon-Arevalo. According to the central bank, CLFG’s financial condition has deteriorated because of related-party transactions, high-risk investments, and high leveraging of the group’s assets. The central bank has announced that it will take control of CLFG’s flagship bank, Clico Investment Bank (CIB), transfer its assets and deposits liabilities to wholly government-owned First Citizens Bank, and revoke CIB’s banking license. CLFG has also disclosed that its insurance companies–CLICO Insurance Co. Ltd. and British American Insurance Co. Ltd.–have sizeable statutory fund deficits. The government has announced that CLFG will divest assets, including its 55% share in Republic Bank Ltd. and share in Methanol Holdings Trinidad Ltd., to First Citizens Bank and the government to make up the statutory fund shortfall, with the government backstopping any deficiency.

“We will resolve the CreditWatch status of the ratings once we can estimate the potential fiscal cost to the government, the broader damage to its financial system, and any impairment to the island’s medium-term growth prospects,” Mr. Sifon-Arevalo added. Trinidad and Tobago enters this CLFG intervention with general government assets exceeding debt by 4.5% of GDP in 2008, a substantial improvement from a net debt position of 20% in 2003. The country’s external position has also strengthened, with net external liabilities of 6% of current account receipts in 2008, down from 134% in 2003. The government’s saving of part of its gas windfall in its Heritage and Stabilization Fund during this period accounts for its fiscal buffer and the country’s improved international investment position.

Further reading:
Sovereign ratings in the Caribbean – An S&P report from May 2007